Institutional Investors Bullish on Stocks in 2016

Institutional investors expect stocks to be the
best-performing assets in 2016, according to a new survey report released by
Natixis Global Asset Management.

“The research also found that investors believe global
political turmoil and changing interest rates will make markets more volatile,”
Natixis explains. “In response, they plan to increase diversification and
devote more of their portfolios to alternative assets.”

Compiling the projections of some 660 large institutional
investors, Natixis finds high hopes for equities across the board—although
certain asset classes are expected to perform better, potentially much better,
than others. For example, the survey finds a pretty strong consensus that global
stocks will outperform both U.S. and emerging markets equities.

David Lafferty, the chief market strategist for Natixis,
tells PLANADVISER institutional investors continue to seek out non-correlated
assets, “and their attraction to equities has as much to do with their aversion
for bonds in the current environment as it does with their enthusiasm for
stocks.” Over the next year, most institutional investors will maintain or
raise their holdings of non-correlated assets, Lafferty adds, including 50% who
will increase private equity holdings and 46% who will increase private debt.

Another 41% will increase allocations to hedge funds and 34%
will add hard assets such as real estate, according to Natixis. The slight majority
believes their alternative assets will perform better in 2016 than they have
this year.

NEXT: Bond use
expected to decrease

According to the Natixis study, institutions currently
allocate 28% of their portfolios to fixed income.

“Over the next year, 42% of institutions expect to decrease
their allocation to fixed income, the largest allocation decrease of all asset
classes,” the report explains. “The same percentage of institutional investors
plan to maintain their allocation and only 16% plan to increase their
allocation to fixed income.”

More than half of institutions predict global politics will
be one of the primary causes of market volatility next year, Natixis finds. A near-majority
of investors cite macroeconomic woes in China (49%), differing international
monetary policies (47%) and changes in interest rates (46%) as top market
headwinds in 2016.

John Hailer, Natixis Global Asset Management CEO for the
Americas and Asia, says the firm’s clients are eager to improve their income
and performance in this environment. “We’re seeing a surge in demand for
innovative strategies that target specific needs across more diversified,
complex portfolios,” he notes.

NEXT: Portfolio shift

One result of increasingly complex portfolio demands is the use
of hybrid approaches to active and passive investing, Natixis finds.

Responding to interest rate pressures and pending rate hikes
from the U.S. Federal Reserve, the majority of institutional investors (65%)
will move from longer-duration bonds to those with shorter durations. Other
adjustments include reducing overall exposure to bonds (49%), Natixis finds, as
well as raising allocations to alternative investments (47%) and using absolute
return strategies (32%).

Lafferty feels there are a few points of conflicted thinking
contained within the data—for example, most institutional investors say they
are focused on risk-adjusted returns more than absolute returns, “but they’re
still tilting their portfolios towards equities, which historically are not the
best asset category for risk-adjusted returns.”

“The move towards alternatives makes more sense given the
focus on reducing risk,” Lafferty concludes, suggesting it's critically important for investors to look beyond the anticipated (short term) Federal Reserve policy-driven bond market volatility in favor of longer-term trends, which suggest bond investment demand will only increase as the investing population ages dramatically in the coming decades.